The determinants of food price inflation in India

Abstract

Food is the most basic of human requirements and when a close to 42% of the country’s population lives on under USD 1.25 a day1 , it becomes imperative to track the prices of food in India. While many government as well as non-government organizations have been ensuring the subsidization of food for the poorest of the poor, even without looking into the leakages in the system, it is not possible to have this as a sustainable model in the long run unless food prices in the country are kept in check and in order to do so, the first step is to identify the various factors that affect the global as well local food prices and then classify them as controllable and uncontrollable factors. The next step would be to minimize the effect of the uncontrollable factors and develop an action plan for the controllable factors to ensure long term sustainability. We have seen that the food prices have been rising globally in the recent past. There are predictions of inflation reaching 8% in India by March, 2010. One of the key drivers of inflation in India has been the high food prices which themselves have seen double digit inflation in the recent months. The rising food prices have devastating implications for the vulnerable sections forcing them to reduce food consumption and nutrition and pushing the near poor back into poverty. The governments across countries are finding it difficult to cope with the rising inflation and the consequent social unrest which are major roadblocks in the growth and development of any economy. While there are certain welfare schemes introduced for the poorer sections of the society such as the NREGS, they do not focus on agriculture or food production and, hence, there is little or no impact of the scheme on agricultural output. This has had an effect on food prices. While there are adequate stocks of rice and wheat in the public distribution system as well as in the open market, there is pressure on other food articles—most importantly, on pulses (these are an important ingredient in the Indian food basket), meat, sugar and vegetables. The Consumer Price Index increases hover around 10% on a year-on-year basis, and there is likely to be greater pressure on the food articles component of this index. The poor monsoon is also likely to exacerbate this impact. Another major factor is the rise in the energy costs. Oil is a force multiplier for inflation. When fuel prices zoom, they feed through to every sector of the economy. Since a lot of farm production depends on diesel pump sets and road transportation, food costs will be both directly and indirectly impacted. Basic principles of supply and demand dictate that to curtail rising food prices we either increase the supply or reduce demand. Demand is a factor of the population of the country and the nutritional requirements of the people. Controlling population is in itself a mammoth and long term task. On the supply side we can either increase the supply of food by increasing production or we can import more food items. The former is a long-term process since it means reducing dependency on the monsoons, increasing the irrigation potential and strengthening the supply chain of cold storages. The latter option -- import of food – would lead to implications on the reserves of foreign exchange of the country and the increased risk associated with loss of food security of a country. The prospect of higher inflation will make things difficult all around. In the recent policy statement of RBI, it is clear that they have shifted their stance from supporting growth to watching inflation closely. Since the fiscal deficit of the government is huge, the Reserve Bank will try to damp down the fire by curbing the monetary expansion through rise in interest rates. This, in turn, will slow down economic growth and government revenues, creating a negative cycle and thus affecting the growth of the economy.